DBRS Finalizes Provisional Ratings on BMW Canada Auto Trust 2016-1 Notes

DBRS Limited (DBRS) has today finalized the following provisional ratings on the Class A-1, Class A-2 and Class A-3 Notes, Series 2016-1 (collectively, the Notes) issued by BMW Canada Auto Trust:

-- Class A-1 Notes, Series 2016-1 (the Class A-1 Notes) rated AAA (sf)
-- Class A-2 Notes, Series 2016-1 (the Class A-2 Notes) rated AAA (sf)
-- Class A-3 Notes, Series 2016-1 (the Class A-3 Notes) rated AAA (sf)

The Notes are supported by a portfolio of retail closed-end lease contracts of new passenger cars and sport-activity vehicles (the Portfolio of Assets). The lease contracts were originated by authorized BMW dealers in Canada.

Repayment of the Notes will be made from collections from the Portfolio of Assets, which includes scheduled monthly lease payments (including residual value payments in the case of customer-retained vehicles) as well as proceeds from vehicle sales either at the end of the lease term or earlier in the case of prepayments and defaults. Proceeds from excess mileage and wear and tear charges, if any, also form part of the collections used to repay the Notes.

The pass-through structure repays the Notes as monthly principal payments are collected from the Portfolio of Assets. The Notes will be repaid in sequential order, with the Class A-1 Notes being repaid first, followed by the repayment of the Class A-2 Notes and finally the repayment of the Class A-3 Notes. The ratings assigned are based on the full repayment of the Notes by their respective Maturity Dates.

The ratings incorporate the following considerations:

HIGH LEVEL OF CREDIT ENHANCEMENT
Target overcollateralization (OC) of 18.25% plus 0.25% of cash plus excess spread. On the Closing Date, 16.25% of credit enhancement is available (0.25% of cash and 16.00% of OC). Excess collections will be applied monthly to repay outstanding principal of the Notes until the OC reaches the target (18.25% of the initial SV), which is expected by month six based on scheduled payments. In addition, 4.33% (annualized) of excess spread, net of cost of funds and the Replacement Servicer Fee provision, will be available to offset any collection shortfalls on a monthly basis.

NON-AMORTIZING CREDIT ENHANCEMENT
The requirement to maintain the cash account and the OC amounts at their target levels provides a deleveraging structure as principal on the Notes is repaid. Residual values represent the largest risk in closed-end auto lease securitizations, and the exposure to such risk is highest at contract maturity. Non-amortizing credit enhancement ensures that an increasing level of protection is available to offset potential vehicle disposition losses as these contracts mature.

CONSERVATIVE ADVANCE RATE ON RESIDUAL VALUES
The Base Residual Value is determined by using the lower of the contract residual values and the ALG estimated values as of March–April 2016. The reference to the ALG values in setting the advance rate on the Notes ensures that expected embedded losses (negative equity in relation to residual values) were not funded on the Closing Date, effectively reducing residual value risk in the Portfolio of Assets. ALG projects its residual values primarily based on auction proceeds and forecasts of economic factors, such as the expected increase in used vehicle supply in the 2016–2018 period. Overall, the ALG values are available on 97.3% of the portfolio and represent an independent estimate of the expected wholesale value of the vehicles in the portfolio at maturity.

STRONG OBLIGOR PROFILE
The obligors of the underlying lease contracts represent high-credit-quality customers, as the weighted-average (WA) FICO score is 802.8. The strong credit profile is also supported by low credit losses and delinquency levels of the Seller’s owned and managed portfolio in the last five years. Alberta and Saskatchewan exposures are limited to 6.3%.

ESTABLISHED REMARKETING STRATEGY
BMW Canada has an established vehicle remarketing strategy to maximize the disposition proceeds and minimize the time to remarket the vehicles should they be returned at or prior to maturity. Historical trends demonstrate BMW Canada’s ability to leverage its dealer network and other dealer groups across Canada to purchase off-lease vehicles. Certified pre-owned and pull-ahead programs offered by BMW Canada create more incentives for dealers to purchase such vehicles, as they increase potential sales prices and also ensure a healthy supply of used vehicles to the dealers. The strategy of selling directly to the dealers reduces its reliance on remarketing vehicles through physical auctions, which generally yield lower proceeds. The enhancement levels are robust enough, however, to support a turn-in rate above 95% and disposition through third-party auctions assuming the more attractive channels are unavailable.

OPERATIONAL AND BRAND STRENGTH OF SELLER
The Seller and its parent, BMW AG (the Company), have been confirmed at “A” with a Positive trend by DBRS as of May 4, 2015. The corporate rating confirmations recognize the Company’s strong earnings performance in the last four years and its strong business profile as the world’s leading automotive manufacturer in the premium vehicle segment. As a subsidiary of BMW AG, BMW Canada benefits from its parent’s strong financial standing, global presence and brand values, allowing it to leverage the experience and expertise of BMW’s other financial services companies worldwide to ensure sound and consistent underwriting standards and efficient servicing operations.

DBRS cash flow analysis included stresses on credit and residual value loss exposures, vehicle turn-in rates and prepayments, and indicates that the credit enhancement available provides sufficient protection to the Notes to warrant the ratings assigned.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Canadian Auto Retail Loan and Lease Securitizations (October 2015) and Legal Criteria for Canadian Structured Finance (August 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link or by contacting us at info@dbrs.com.